by Prime Minister Geir H. Haarde
to the annual meeting of
the Confederation of Icelandic Employers
April 18th 2008
Ladies and gentlemen.
Let me begin by congratulating Mr. Thor Sigfusson on his election to the chairmanship of the Confederation of Icelandic Employers. I have no doubt that he will prove to be an effective head of the organisation. I also wish to thank the outgoing chairman, Mr. Ingimundur Sigurpalsson, for working with the present and former governments during his chairmanship. In his work, he emphasised the sincere will to cooperate that has characterised the relationship of employers and unions in the labour market for close to two decades, and no less the relationship of these two entities with the Government. I think it is often not valued enough how important it is that employers and unions have cooperated in a positive spirit and thereby contributed towards the prosperity of the economy.
Turbulence in the Icelandic economy - A sound foundation
On the occasion of this annual meeting I think it is appropriate to try to see beyond our day-to-day issues and look towards the future, as is noted in the agenda. I doubt that any amongst us would have suspected last summer, when the news appeared that two hedge funds of Bear Stearns, the US investment bank, were in difficulty and that we would thereby be at the threshold of a severe storm that would shake financial markets throughout the world and bring the world’s largest economy to the edge of a precipitous downturn with consequent adversity for the world as a whole. I also doubt that anyone would have suspected that Iceland would within a few months find itself persistently discussed in business news media throughout the world. And I also doubt that anyone would have believed that Iceland would become the target of speculators, as now has turned out to be the case – not to mention that a noted foreign scholar would be warned that his reputation could be impaired if he continued to voice his positive opinion of the Icelandic economy and banking system.
The situation in the US financial market was such that financial investment vehicles had been developed that were so complicated that very few could understand. Almost all financial papers could be marketed and priced, regardless of risk. The so-called structured investment vehicles that financial institutions traded contained a mixture of high-risk and lesser-risk loans. But in the end they went too far. Luckily for Icelandic financial firms, they were only marginally affected by such investment vehicles, but instead they have become the victims of these circumstances. They must react realistically by increasing their cost-effectiveness, divesting some assets and temporarily scale down their activity.
It is clear that the Icelandic economy has been damaged by these events in international financial markets. Banks throughout the world have reduced their activity, restricted credit in order to avoid a liquidity squeeze. This has also taken place in this country, not only amongst the large commercial banks but also among smaller banks and savings banks. According to the recently issued forecast of the International Monetary Fund, these difficulties have reduced growth throughout the world and have naturally had an effect here. In addition, it should be noted that prices for many basic commodities, such as crude oil and wheat to name but two, have increased sharply and greatly affected developments throughout the world. At the same time as the external conditions of our economy have deteriorated, the wave of large investment projects are drawing to a close, in energy and aluminium plants as well as in housing and business capital formation.
All told, it is inevitable that the Icelandic economy will slow down in the near future. With this in view, it was decided at the time of passage of the 2008 fiscal budget to increase public investment in order to offset the expected decline in private investment. It was also anticipated that the exchange rate of the króna would gradually decline as the economy slowed down, since many economists were of the opinion that the exchange rate had for some time been above the level warranted by economic fundamentals. But still, it came as a surprise how sharply the exchange rate has declined in recent weeks and months. This has meant that inflation prospects have considerably dimmed.
Ladies and gentlemen.
I have sometimes felt that these issues have been irresponsibly discussed and with a lack of understanding here at home. Certain politicians and media have asserted that nothing is being done, as it is called. There are those who speak as if the authorities possess a magic wand not available elsewhere, when the fact is that international turbulence is affecting our economy beyond our control. The actual truth is that the Government, and especially the Central Bank, have in recent days and weeks worked very hard to counter the difficulties foisted upon us by international circumstances. Such measures require, by their very nature, a long period of preparation and can not be publicised in the news on a day-to-day basis. A wide-ranging public discussion could have unfortunate consequences, create unrealistic expectations and have adverse effects. One of the advantages of Iceland’s public administration and business is that communication channels are short and decision-making can be quick. This can also become a weakness when we demand the same speed of considerably larger systems and become impatient with longer communication channels and more involved decision-making processes than we are used to.
The adverse foreign publicity of the Icelandic economy and its banking system, the contraction in the lending of commercial and savings banks, the sharp decline in the exchange rate of the currency and the increases in prices of many goods and services have caused some disquiet in the country. This is understandable. A whole generation of entrepreneurs has been raised in this country that never has been compelled to deal with such difficulties. I do believe that this is a temporary situation, since many aspects of our economy are very positive, both in the short and long run.
In the discussion of the state of the Icelandic banks, less attention has been paid to other sectors that are no less important for our economy. The fisheries sector has become an enormously powerful and modern industry of great importance for the economy. Tourist services have also grown rapidly in recent years and become one of the basic sectors of the economy. Finally, I wish to call attention to the many high-tech firms that have prospered and are doing business in many countries in Europe, Asia and elsewhere. Together, these sectors create a foundation for a robust and diversified economy that enjoys good growth prospects for the future.
I also wish to mention that our energy sources are becoming ever more important as the energy sources of the world are gradually diminishing. The same applies to our agricultural and fisheries products and to our Icelandic water as the world population increases and the value of a healthy lifestyle and unadultered food goes up. Furthermore, the increasing activity of Icelandic firms abroad has created more foundations for our economy. The number of highly educated people is gradually increasing. This is most important since economic prosperity undoubtedly increases in line with a higher level of education.
It should also be borne in mind that the system of pension funds is very strong and as a whole self-sustaining. We tend to take this for granted, but this is not the case. A comparison with other countries reveals that other pension systems are structured on a throughput basis, where pension payments each year are paid for with taxes in the same year and not from funds that have been built up for decades through the regular contributions of wage earners. This should be kept in mind because the number of pensioners will increase rapidly in the next several decades. This will require increased public expenditure in many countries. It seems to me that many of the foreign observers that have discussed our economy of late have not realised our strength in this respect, as it is almost unique amongst Western nations.
Let me also mention another important matter that seems to have escaped the attention of foreign analysts and has in fact been amazingly little discussed here at home. I am referring to recent statistics published by the Central Bank in its Monetary Bulletin in the article on the net external position of the Icelandic economy. These figures are based on a new accounting standard that has not been used so far. It shows that the net external debt of the economy is far lower than the earlier method indicated. It shows that the net external debt is equivalent to 27 per cent of GDP at the end of the third quarter of 2007 instead of 120 per cent according to the previous standard. The difference between the two accounting standards is that the earlier standard only counted the book price of foreign assets, whereas the new stamdard is based on their estimated market value. The figures under the new standard are in full accordance with the standards of the International Monetary Fund. They are more difficult to assemble and have therefore not been disclosed before. I think it is important that the figures for earlier years are revised by the new method as soon as possible.
Ladies and gentlemen.
The impact of globalisation.
Last week, the Prime Ministers of the Nordic countries met to discuss the same topic that is on our agenda today, that is how our countries could jointly formulate a policy to make use of the opportunities offered by globalisation. Leaders in politics, science, media, business and social organisations were also invited to attend.
At the meeting, emphasis was placed on three points: First, how the Nordic countries could be joined in a common market area with a strong competitive position. This is an issue of great interest to us, since many of our businesses and entrepreneurs have used opportunities for business in other Nordic countries. Second, to develop Nordic cooperation in science and innovation so as to strengthen the foundations for research in our countries. Third, how Nordic cooperation can be extended so as best to prepare for and lead negotiations for a new international climate agreement next year. The aim is to create a self-sustained community of the Nordic countries. The next meeting of this order will take place here in this country in about a year.
In preparation for this meeting, the Nordic Council of Ministers issued a very interesting report, the Nordic Globalisation Barometer. This barometer indicates that the Nordic countries have done a good job in times of change and new circumstances. Their prosperity has increased through their competitiveness and strong interrelationships with the world economy. The Nordic Globalisation Barometer also indicates that the Nordic countries must continue to be diligent. The competition from other areas of the world has reduced their advantage.
Ladies and gentlemen.
Let me close by a discussion of our European relations. Our participation in the globalisation process in recent years, along with the adversity currently encountered by the Icelandic financial system and the economy, have called the attention to Iceland’s position in the world community. Our independence, our participation in Nordic cooperation, European cooperation and on the international level has proven quite beneficial to us. The European Economic Area is of utmost importance in my judgment. Today it is impossible to understand that our participation in this important cooperation once ignited the most fervent controversy in recent years in Icelandic politics. It is therefore no wonder that most of those who opposed our participation in the European Economic Area, or abstained, are now loath to recall their earlier stance.
Our participation in the EEA cooperation, along with our determined privatisation effort since 1991 and our tax cuts has unleashed forces that have revolutionised our economy and created immeasurable wealth. Although we face adversity at present, there is general agreement amongst those who follow events in our economy that much success has been achieved and that our foundations are strong and prospects good for the future.
There have been those who have maintained that developments in recent years, especially the adversity of recent months, show that we Icelanders should unilaterally adopt the euro as our currency instead of the króna. I believe that this discussion was definitely brought to a close at the annual meeting of the Chamber of Commerce as well as in my conversations with several of the leaders of the European Union last February. The conclusion simply is that the euro will not be adopted as our currency without membership in the European Union. There are some who have responded by naming other currencies. The unilateral adoption of another currency is not realistic in my opinion. We are one of the richest and most developed nations in the world and such nations simply do not adopt the currency of another nation.
In my mind, we are faced with two clear choices: That Iceland remains outside the European Union and continues to use the króna, or joins the EU and subsequently adopts the euro as a currency, provided that the country fulfils all conditions attached thereto. Both these avenues have their advantages and disadvantages. We know that the first option, to stand outside the EU, has turned out well so far. At the same time it is evident that changes in the Icelandic economy along with ever-increasing activity abroad has called for certain changes. The latter option, to join the EU, is in my judgment considerably less advantageous as I have often pointed out. As an example, we would thereby lose our independence in concluding free trade agreements, we would lose our monetary policy independence that would entail a vastly increased burden for our fiscal policy and lead to increased fluctuations in unemployment and in the labour market. The burden for our small public administration would be greater than many suspect. I still have not mentioned our fisheries management issues, the difficulties of which in relation to the EU are well-known.
This morning I returned from Newfoundland in Canada. There are many there who are of the opinion that their greatest curse in managing fisheries has been that the province was not in full control over their fisheries management. The cod disappeared from the banks off Newfoundland more than fifteen years ago, mostly because of overfishing and mistakes in fisheries management. Such experience must provide us with much food for thought.
In discussion of these issues, we must not be influenced by temporary adversity or hopes of temporary gain. The interests of all our economic sectors must be looked after, and the impact on our national fabric in the present and future must be assessed. These issues do not only have to do with monetary gain. Scores of thousands of Icelanders still living today rejoiced at the time of Iceland’s independence in 1944. Although an EU membership is not tantamount to a surrender of our independence, it nevertheless would mean that our control over a number of issues would be transferred to the EU upon membership.
I have recently appointed a committee to discuss the development of our European issues in accordance with the Government’s Policy Statement. One of the committee’s tasks is to assess how our interests can best be safeguarded in the future with respect the European Union. The committee will set its own pace and turn in a report no less than once a year. The work of this committee follows the report of the so-called Europe Committee that completed its work about a year ago. The report forms the basis for the work ahead. It is therefore absurd to maintain that these issues are not on the Government’s table and are not allowed, as sometimes has been maintained.
Ladies and gentlemen.
The Icelandic economy is going through a period of adversity that we must all join in meeting. We must not focus on these difficulties but rather remember the fact that our standard of living is high, the foundations of our economy solid and that we enjoy a good reputation. This is agreed by all who acquaint themselves with Iceland’s affairs. We are in possession of priceless natural resources that are constantly increasing in value. These facts will naturally help us in the current turbulence and will pave the way for our future prosperity.